RBA minutes reiterate concern about property risks

Banks' exposure to property developers and investors remained the biggest single risk to Australia's financial system, according to the minutes of the Reserve Bank of Australia's October board meeting, but the economy was adjusting well to the end of the mining investment boom.

Members voted to hold the cash rate at 2 per cent for the fifth month in a row at the meeting, two weeks ago, and there was nothing in the minutes on Tuesday to suggest they would change this stance.

A raft of contentious strata rules have been revealed in the new strata regulations.Credit:Robert Shakespeare

As a result, the Australian dollar jumped from US72.58¢ to US$72.71¢ when the minutes were published, before easing slightly again. In late local trade it was fetching US72.70¢.

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The RBA said the Aussie's depreciation, in line with falling commodity prices, along with low interest rates had helped the economy rebalance without costing jobs. After weak expansion in gross domestic product in the June quarter, growth in the September quarter was "expected to have strengthened", the RBA said.

Annual inflation has crept back into the Reserve Bank of Australia's 2-3 per cent target range for the first time in 3 1/2 years after a jump in education, health and transport costs.Credit:Louie Douvis

However, the board also noted a build-up of risks in commercial and residential property development, mainly concerning oversupply.This has since been detailed in the RBA's half-yearly financial stability report, released on on Friday.

Privy to a summary of this at the October 6 board meeting, members had noted "that domestic sources of risk to financial stability in Australia continued to revolve mainly around developments in local property markets". A study of banks' loan portfolios also revealed that lending to investors made up more of the total than thought, and that lending standards had also been too loose in some instances.

"Members further observed that the risks in commercial property and the property development sector were rising," the minutes said.

"Building approvals for new apartments remained very strong over 2015, even though rental markets appeared soft in some areas.

"The divergence between commercial property valuations and rents had widened further, with strong domestic and foreign investor interest for new and existing office buildings in particular, even though vacancy rates were quite high," the bank said.

However, it said regulatory reforms designed to slow the pace of lending to buy-to-let and buy-to-sell investors and property developers were beginning to work.

"Moreover, it sees a further improvement in business conditions and believes that forward-looking indicators of the labour market suggest a steady-to-lower unemployment rate," he said.

"The latter is a notable improvement on last month's minutes, where it indicated that leading indicators suggested the unemployment rate could either rise or fall a little," Ticehurst noted.

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However, he said the RBA's observation about softening house price growth in Sydney "sits very oddly" with its original October 6 policy statement, when it noted that dwelling prices continued to 'rise strongly in Sydney and Melbourne'.

"The RBA did, however, balance out its latest statement on house prices by saying that 'it was too early to be confident that these signs of slowing in house price inflation would be sustained'," said Ticehurst.